Do Financing Constraints Lead to Incremental Tax Planning? Evidence from the Pension Protection Act of 2006

53 Pages Posted: 1 Aug 2018 Last revised: 22 Jun 2020

See all articles by John L. Campbell

John L. Campbell

University of Georgia - J.M. Tull School of Accounting

Nathan C. Goldman

North Carolina State University - Department of Accounting

Bin Li

University of Houston - Department of Accountancy & Taxation

Date Written: June 2020

Abstract

Whether firms facing greater financing constraints turn to tax strategies that generate lower cash effective tax rates (ETRs) to mitigate the adverse effect of these financing constraints remains an empirical question of interest. We use the Pension Protection Act of 2006 (PPA 2006) as an exogenous shock to financing constraints for pension firms, but not for other firms. Using a difference-in-difference research design, we find that pension firms decrease their cash effective tax rates by 1.8 to 2.4 percent after the PPA 2006, but other firms do not experience such a decrease. These cash tax savings mitigate the investment shortfall brought about by financing constraints by 19 percent. Our paper sheds light on the direction, causality, and economic magnitude of the association between financing constraints and tax planning activities and provides insight into the role of tax planning activities within firms’ broader corporate business strategies in responding to financing constraints.

Suggested Citation

Campbell, John L. and Goldman, Nathan C. and Li, Bin, Do Financing Constraints Lead to Incremental Tax Planning? Evidence from the Pension Protection Act of 2006 (June 2020). 29th Annual Conference on Financial Economics & Accounting 2018, Available at SSRN: https://ssrn.com/abstract=3223821 or http://dx.doi.org/10.2139/ssrn.3223821

John L. Campbell

University of Georgia - J.M. Tull School of Accounting ( email )

Athens, GA 30602
United States
706.542.3595 (Phone)
706.542.3630 (Fax)

Nathan C. Goldman (Contact Author)

North Carolina State University - Department of Accounting ( email )

Raleigh, NC 27695-8113
United States

Bin Li

University of Houston - Department of Accountancy & Taxation ( email )

Bauer College of Business
4800 Calhoun Road
Houston, TX 77204
United States

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